The Role of Intangible Asset Specificity on Relational Governance of
International Subcontracting Relationships: An Asymmetric
Interorganizational Relationship Perspective
Shih Chieh Fang 1
Shih Chin Tai 3
Julia L. Lin 2
Cheng-Kai Hu 3
1
Professor, Graduate Institute of Business Management, National Kaohsiung First University
of Science and Technology
2
3
Professor, Graduate School of Management, I-Shou University
Doctoral Student, Graduate School of Management, I-Shou University
1, Section 1, Hsueh-Cheng Rd., Ta-Hsu Hsiang, Kaohsiung County, Taiwan 840, R.O.C.
Tel: (886)-7-6577711
e-mail: derek9671@so-net.net.tw
The Role of Intangible Asset Specificity on Relational Governance of
International Subcontracting Relationships: An Asymmetric
Interorganizational Relationship Perspective
Abstract
Interorganizational relationships play a crucial role for firms to develop competitive
advantage. A growing number of influential studies in the field of strategic management as
well as the organization theory have demonstrated the important role of interorganizational
relationship. While most of the studies focus on the symmetric relationship or the perspective
of dominant actors, such as MNEs, less attention has been paid to the weak actors in an
asymmetric relationship. This study, employed intangible asset specificity as a moderator,
aims to explore the effects of dependence and trust on relational governance in
interorganizational relationships. By focusing on international subcontracting relationships,
we argue that symmetry dependence and trust are positively associated with the relational
governance in an asymmetric interorganizational relationship, and intangible asset specificity
has the moderating effects on them.
Keywords: interorganizational relationships; asset specificity; governance; international
subcontracting; intangible assets
1
Introduction
The trend of globalization and the increasing growth of interorganizational relationships
(IORs), alliances or networks, have an important impact both on domestic and international
economic activities. With characteristics of specialization and division of labor,
interorganizational cooperation, in addition to foreign direct investment, is a strategic choice
for multinational enterprises (MNEs), especially in the context of innovation and technology
development. MNEs need to seek the best way to coordinate the specialized and
interdependent tasks in cooperative relationships (Cantwell & Narula, 2001; Foss, 2001; Chen,
2005). IORs, receiving considerable attention in recent years, have become a dominant
strategy for firms to access the critical resources, or reduce environmental uncertainty
(Sobrero & Schrader, 1998; Lorenzoni & Lipparini, 1999). Research in IORs, such as
strategic alliances, outsourcing, and partnership with external actors, also has shown that
coordination of external linkages with partners is equivalent to internal networks for
competence and performance of MNEs (Scott-Kennel & Enderwick, 2004; Murray, Kotabe &
Zhou, 2005). Furthermore, based on strategic management perspective, organizations would
enter into such collaborations that involve in relationship-specific investments and
knowledge-intensive activities, which in turn result in the generation of idiosyncratic rents
and value creation (Dyer & Singh, 1998; Madhok, 2000a). Thus, it is worth exploring the
relational governance and management of IORs to enhance the development of theories and
practices.
Practically, many MNEs such as IBM, Dell, increasingly outsource the components of
their final product from subcontractors by emphasizing on the value-creation activities (e.g.
R&D and marketing). While most of prior studies are based on the view of dominant firms
(e.g. MNEs), and emphasize the importance of bargaining power and performance of
2
dominant firms in an interorganizational relationship (Buvik & Reve, 2002; Lee, Chen & Kao,
2003; Murray et al., 2005), little research has examined the benefits and governance issues of
subcontractors in developing countries such as Taiwanese computer supplies (Chen, 2005).
That is, a ubiquitous phenomenon of asymmetric IORs which represents power-dependent
relationships between powerful and powerless firms. Thus, based on the perspective of the
weaker firms, it is necessary to explore how they organize their relationship with other
powerful firms in asymmetric IORs.
The concepts of power dependence logic have been extended not only to explore the
context of cooperative IORs, but to understand a shift from unequal distribution of power and
predict exchange outcomes (Pfeffer & Salancik, 1978; Gray, 2000; Kim, Hoskisson & Wan,
2004). Especially, it is useful to focus on the features of instability and interorganizational
dependence that is created by assets specificity or asymmetric dependence between two actors
in asymmetric IORs (Heide & John, 1988; Inkpen & Beamish, 1997; Kim et al., 2004). In
addition, bargaining power perspective, including context-based and resource-based
components, is also appropriate for the examination of instability of asymmetric IORs by
recognizing the negotiating relationship of dyadic firms (Yan & Gray, 1994). Nevertheless,
the contextual factors, such as firm size and strategic importance, that might be decided or
arranged ex ante, are indirectly related to the dynamic cooperative relationships. The
attractiveness, which invokes cooperative intent of partners, of continuance and instability in
exchange relationship also depend on ex post change conditions (Reuer & Koza, 2000). The
latter, linking to the resources and capabilities committed and contributed by partners in
trading relationships, is a major source of bargaining power (Inkpen & Beamish, 1997).
Therefore, it is an important issue to incorporate the resource-based components which may
influence potential shift of power-dependence status.
3
The core spirit of research in IORs relies heavily on the governance and management
among firms that characterize different coordination and cooperation properties (Sobrero &
Schrader, 1998; Chuang & Fang, 2005). Base on transaction cost economics, in order to
protect specific assets from opportunistic exploitation, firms should choose the necessary
governance structure/mechanism to reduce a safeguarding problem, which is the most
significant governance problem (Zaheer & Venkatraman; 1995; Rindfleisch & Heide, 1997).
Apart from transaction cost economics, research in relational views (Dyer, 1997; Dyer &
Singh, 1998) indicates that investment in relationship-specific assets can create transaction
value rather than increase transaction cost. Particularly in knowledge-driven economic
activities, Intangible asset specificity, which are on basis of knowledge and expertise as well
as embedded in daily operating processes, play an important role in IORs (Subramani &
Venkatraman, 2003). Despite the significance of asset specificity in IORs, most of the
literatures neglect the question of power-dependent relationship between dyadic firms.
Moreover, a governance problem resulting from investment in asset specificity in the context
of asymmetric IORs would be worse than IORs, if firms do not have appropriate
arrangements. Thus, we will further investigate the nature and determinants of asymmetric
IORs as well as how weaker firms govern asymmetric IORs to change relative bargaining
power.
The paper proceeds in several sections. We first clarify the nature and logic of IORs as
well as review the relevant literature and theoretic perspectives in asymmetric relationships.
Next, we attempt to make the distinction between ex ante and ex post considerations about the
phenomena of asymmetric IORs. Finally, from the point of view of governance, resulting
from assets specificity, we put an emphasis on the role of intangible asset specificity in the
context of asymmetric international subcontracting relationships.
4
Theoretical Background
Asymmetric Interorganizational Relationships
Organizations as open systems, shaped and influenced by external environment, should
to notice the importance of organization-environment linkages and technological or market
change for survival rather than rely on the success of past experiences (Scott, 2003).
Particularly, in the environments of globalizing competition and market division of labor,
organizations engage in the interorganizational relationships with their stakeholders such as
suppliers, customers and other resource providers, to secure unique resources and set the
organizational domain. Research indicates that management and coordination of IORs could
provide appropriate response to uncertainty and rapid changes in technology (Ring & Van de
Ven, 1992; Gulati & Singh, 1998). Previous studies indicate that understanding how partners
interact or coordinate, such as the distribution of rights, the exchange of information and
resources flow (e.g. specificity of assets which one partner contributed), is expected to be
important predictors of management and arrangement (governance) of inter-firm relationships
(Grandori & Soda, 1995; Sobrero & Schrader, 1998; Lambe, Spekman & Hunt, 2000). There
are complex and intertwined transactional interdependence (e.g. exchange) and cooperative
interdependence (e.g. production) in the management of inter-firm cooperation (Grandori &
Soda, 1995; Madhok, 2000b). The coordination between partners may depend on task
characteristics, degree of interdependence of activities that they performed, and
embeddedness that is defined as all economic behavior is embedded in a larger social context
(Sobrero & Schrader, 1998; Borgatti & Foster, 2003). The embedded ties could constrain the
direction and forms of economic relationship which parties develop. Thus, the embeddedness
or patterns of relationship can shape the interaction of information and resources flow in
exchange and production activities of IORs.
5
Nevertheless, little research has examined the phenomena of asymmetric IORs. Based on
the evolutional economics, most firms started out as small and medium-sized enterprises
(SMEs). SMEs have disadvantages of limited resources and capabilities, difficulty to compete
with large multinational enterprises, vulnerability to the exercise of bargaining power with
more powerful firms and limited capacity to shape the development of market, technological
changes (Ernst, 2000; Kaufman, Wood & Theyel, 2000). However, SMEs have the
characteristics of flexibility, innovation and adaptation to uncertainty and rapid change, which
large enterprises are lack of. Actually, there exists the fact that SMEs could succeed and
survive through continuously upgrading and development in highly global competitive
environment (Ernst, 2000; Kaufman et al, 2000). Thus, we investigate how disadvantageous
firms cooperate, coordinate and bargain with large powerful enterprises as well as improve
their competence/capabilities in asymmetric IORs.
The important theories that sets emerged as particularly relevant to the study of
asymmetric IORs are reviewed in the following. The main implication of resource
dependence theory (RDT) or power dependence theory is to identify the embedded
power-dependence relationships (Emerson, 1962; Pfeffer & Salancik, 1978). The relative
dependence between two actors in an exchange relationship determines their relative power
(Hallen, Johanson, & Seyed-Mohamed, 1991). For instance, actor A’ powering relationship
with B is the inverse of B’s dependence upon A, that is, power resides in the dependence of
one firm on another. The less dependent firm will have a power advantage, resulting in a
power imbalance (Kim et al., 2004). Following RDT, researchers argue that it is necessary to
explore the issues such as degree of power-dependence in specific exchanges, critical strategic
resources (e.g. assets specificity) which are controlled by partners and mutual dependence
(Heide, 1994, Kim et al., 2004). Thus, we could view asymmetric IORs in terms of the
power-dependence relations for understanding ex ante and ex post changes of asymmetric
6
IORs.
Yan and Gray (1994) contend that bargaining power comprises two components:
context-based and resource-based bargaining power. Fist, there are availability of alternatives
and strategic importance in the context-based components. Availability of alternatives refers
to the extent to which they can choose different arrangements in the negotiation relationship.
For instance, Heide and John (1988) argue that agencies with specific assets invested in
manufacturer-agency dyad must reduce their dependence by increasing the replaceability of
the incumbent partners (i.e. increasing of alternatives). Second, researchers identified resource
dependence as a source of bargaining power (Yan & Gray, 1994; Inkpen & Beamish, 1997).
The resources and capabilities committed or contributed by the partners are a major source of
the resource-based components. Put differently, the relative bargaining power of partners in
asymmetric IORs is determined by who brings what and how much to the specific relation.
Based on resources contributions as a determinant of patterns of control in collaborative
relationship, the relative bargaining power cannot only be evaluated by the existence of
contribution, but also can be determined by the types of contributed resources, such as
tangible (factory, equipment) and intangible resources (e.g. technology, manufacturing
know-how, management expertise, and knowledge) (Lee, Chen & Kao, 2003). Contrasting
with RDT which argues that A must build an alliance with B, to reduce uncertainty and secure
access of necessary resources, Yan and Gray (1994) indicates that if B contributes more
critical resources to the alliance than A, B will gain more bargaining power. Thus, both
perspectives represent the same meaning: “B is more powerful than A”.
In addition to RDT and bargaining power perspective, prior literature also provides
different point of views for investigating asymmetric IORs. For instance, Ernst (2000)
describes the asymmetric IORs between Taiwanese firms and larger MNEs in terms of firm
7
size. Lee et al. (2003), Dhanaraj and Beamish (2004) view the occurrence of instability of
asymmetric IORs (IJVs) in terms of degree of equity ownerships. Heide and John (1988),
Bovik and Reve (2001) highlight the problems of asymmetric dependence between buyer and
supplier in terms of whether deployment of specific assets is balanced. Despite prior literature,
including bargaining power perspective, pays more attention to power-dependence structure
of asymmetric IORs, patterns of asymmetry or interdependence actually have been decided or
arranged before partners between cooperative relationships undertake economic activities.
There may be firm size, whether firms deploy specific assets, availability of alternatives and
strategic importance of partners (Yan & Gray, 1994) in ex ante determinants of cooperative
relationships. Namely, they can be views as patterns of relationship. For example, Parkhe
(1993) suggests that, based on ex ante expected duration, firms ought to make
transaction-specific investments to enhance efficiency. However, there are some crucial
obstacles in explaining changes in partner relationships status after patterns of relationship
have been decided. For example, when firms make transaction-specific investments ex ante,
ex post exchange condition such as perception of transactional attributes and accumulation of
information may change (Reuer & Koza, 2000). Thus, it is necessary to distinguish between
ex ante and ex post considerations of asymmetric IORs. The latter can be regarded as change
in knowledge flow (e.g. shifts through acquisition of knowledge) (Inkpen & Beamish, 1997),
resources flow (Dussauge, Garrette & Mitchell, 2004), and control in information flow
(Gulati, Khanna & Nohria, 1994) as an outcome of patterns of asymmetric IORs.
The patterns of the relative bargaining power of asymmetric IORs vary from one
relationship to another. Following the above argument of IORs, such patterns of asymmetric
IORs represent the different exchange and flow of information and resources (Bovik & Reve,
2002; Lee et al., 2003). For instance, Kern and Willcocks (2000) indicate that, in case study of
cooperative relationship of Xerox and EDS, Xerox at first excessively relied on information
8
systems of EDS to monitor performance due to IT outsourcing strategic partnership. After
building its own information management, Xerox regained centrality of information and
affected the power-dependence balance. In other words, asymmetries in information and
resources flow have been considered as predictors of whether it is asymmetric or not in IORs
arrangements (Grandori & Soda, 1995). Asymmetries in resources flow demonstrate how
resource contributions can influence relative bargaining power and the occurrence of
asymmetric governance structure (Lee et al., 2003). In addition, based on transaction cost
economics and agency theory, information asymmetry, refers to the incomplete or distorted
disclosure of information, is a consequence of the inability of ex ante selection, screening,
measurement of partners’ competence and ex post monitoring to detect shirking or moral
hazard (Williamson, 1985; Stump & Heide, 1996). Information flows, that can provide an
early warning system, such as information gathering, detailed reports and conflict managing,
play an important role in managing dynamic process of alliances (Gulati et al., 1994). Without
such efforts, partners in cooperative IORs might incur higher transaction cost (or information
cost) and lead to lock-in or hold-up problems, especially when making assets specificity
(Hennart, 1994; Bensaou & Anderson, 1999). This refers to both ‘assets specificity and
information asymmetry are inseparable’ as Williamson (1985, p.83) denotes. In this paper, we
will merely explore ex ante patterns of relationships and ex post types of asymmetric IORs
from the aspects of asymmetry in information flow due to assets specificity.
International Subcontracting Relationship
International subcontracting relationships refers to a cross-border alliance between
Taiwanese computer suppliers and international technological firms such as HP, Dell.
International subcontracting relationships represents a pattern of strategic alliance under the
horizontally configured industries (Chen & Lee, 1997). It also shows a pattern of long-term
9
and specific exchange relationship rather than a type of spot contract or market. Spoken
generally, because decisions-making of appropriation and bargaining almost depend on
international firms, Taiwanese suppliers, which are characterized by risky positions of
disadvantages, will be highly dependent on larger international firms. They have to invest in
specific assets in order to foster high level of trust, keep the business with international firms
and gain more orders (Rindfleisch & Heide, 1997). In other words, Taiwanese firms with
specific assets not only might consider such subcontracting relationship as an important or
highly valued exchange, but also could have fewer alternatives and difficulty in replacing
incumbent international firms (Heide & John, 1988; Yan & Gray, 1994). Accordingly, based
on RDT and bargaining power approach, we could view international subcontracting
relationships as a mode of asymmetric IORs.
The relative bargaining power of partners in asymmetric IORs shapes the patterns of
management control mechanisms, such as equity structure control, informal management
control, and asymmetric governance structure (Yan & Gray, 1994; Lee et al., 2003). The
governance structure is not only unilaterally chosen by one partner, but is the results of
bilateral or repeated bargaining through a series of dynamic negotiation processes (Lee, Chen,
& Kao, 1998). It is used to regulate the exchange and flow of information and resources of
economic activities of IORs (Bovik & Reve, 2002). Moreover, researchers also highlight that
governance structure/mechanism can be used to manage IORs which have the governance
problem such as hold-up due to investment in specific assets (Zaheer & Venkatraman, 1995;
Rindfleisch & Heide, 1997).
Nevertheless, the advantage of implementing governance device is highly contingent on
the power-dependence structure in specific relationships (Bovik & Reve, 2002). Weaker
Taiwanese supplier, invests in specific assets for international large firm, is highly likely to be
10
restricted to asymmetry in information flow, which in turn leads to hold-up of governance
problem and instability of power-dependence relationship. Thus, drawn on governance
perspective, we will explore phenomenon of hold-up problem derived from asset specificity
and information asymmetry as well as change of the relative bargaining power of partners in
asymmetric international subcontracting relationships.
Relational governance
The choice of governance structure, that is the core issue investigated by transaction cost
economics, is not only to provide, at minimum cost, the necessary coordination, control and
trust, but also to make the exchange better off (Williamson, 1985; Dyer, 1996). The purpose
of governance is used to manage the governance problems, such as safeguarding specific
assets and adaptation (Rindfleisch & Heide, 1997). During the recent years, the governance
perspective has become influential in research into IORs (Heide, 1994; Zaheer &
Venkatraman, 1995; Dyer, 1996; Madhok, 2002). “Governance” has been defined as a mode
of organizing transactions (Williamson & Ouchi, 1981). Heide (1994) argued that governance
is a multidimensional phenomenon, including the initiation, ongoing relationship maintenance
and termination between exchange partners. Thus, governance structures, such as markets,
hybrids and hierarchies, may be defined as institutional arrangements that structure, organize,
and coordinate the behaviors of the partners in the relationship (Dyer, 1996; Sobrero &
Schrader, 1998). Given specific governance structure or IORs, the purpose of governance
mechanisms that is a device of institutional arrangements is to provide the necessary
coordination and control for remedying the transaction problems (Chi, 1994; Dyer, 1996).
According to Heide (1994), transaction cost economics original framework views the
governance decision as choices between markets that rely on prices mechanisms and
hierarchies that govern through a unified authority structure. The framework explicitly
11
suggests that we can adopt the alternative governance mechanisms from efficiency
considerations. The logic of this argument is based on the assumption of internal
organizations that can minimize transaction costs (Rindfleisch & Heide, 1997). Scholars who
focus on relational views argue that exchange partners involve repeated transactions, such as
bilateral governance (Heide, 1994), relational norms (Heide & John, 1992) and relational
contracts (Ring & Van de Ven, 1992), to pursue long-term benefits and engage in the process
of ‘projecting exchange into the future’ (Dyer, 1997; Samiee & Walters, 2003). Firms between
exchange relationships may generate relational rents through the synergistic combination of
relational-specific assets, knowledge-sharing routines and capabilities (Dyer & Singh, 1998).
Effective governance can generate rents by lower transaction costs and maximize
transaction value (Dyer, 1997; Dyer & Singh, 1998). There must be a non-economic
component, such as ‘social’ or ‘relational’, in the governance of exchange relationship (Ring
& Van de Ven, 1992; Zaheer & Venkatraman; 1995). Granovetter (1985) argued that socially
embedded personal relationships play an important role in economic exchange. Zaheer and
Venkatraman (1995) use the term ‘relational governance’ to explain the economic and
sociological phenomena of exchange which includes specific assets, combined with
interorganizational trust. The purpose of such an intermediate governance mode, which is
viewed as the interorganizational strategy of the firm, is to protect the party with specific
assets from their appropriation and focus on the expectations of relationship continuity (Joshi
& Campbell, 2003).
Dimensions of Relational Governance
Zaheer and Venkatraman (1995) identified two basic components of relational
governance: structure and process components. They view the former as the degree of vertical
quasi-integration reflecting the degree of continuum which goes from spot market to
12
hierarchical structure. The structure dimension of governance refers to interdependence
between which the exchange takes place. However, due to extensive coordination in alliance
activities which include many cooperative agreements between firms that involve exchange
and sharing of resources and information, Gulati & Singh (1998) argue that both the extent of
coordination costs and appropriation concerns in an alliance can be used to predict the choice
of governance structure in terms of the degree of hierarchical control. The premise of
hierarchical controls as a response to appropriation concerns which originate from contracting
obstacles and potential behavioral uncertainty is drawn on their ability to identify control by
fiat and provide monitoring. In addition, coordination considerations, including complexity of
tasks, necessary coordination of activities to be completed jointly or individually, are
extensive in alliances. Hierarchical controls could be effective solutions in conditions of
highly anticipated coordination costs.
Zaheer and Venkatraman (1995) view governance process as the degree of joint action in
the exchange relationship. It is used to describe the interfirm activities of exchange in the
governance structure. Joint action refers to the extent of close relationship that the partners
carry out focal activities, such as product design and long-term planning, in a coordinated way
(Heide & John, 1990). Zaheer and Venkatraman (1995) argue that joint action can be seen as a
safeguard for specific assets that firms might invest. Partners would like to engage in
cooperative endeavor and expectations of future continuous exchange.
Dependence, Trust and Relational Governance
In general, transaction cost economics is the most significant determinants of the
governance structures/mechanisms (Heide, 1994; Zaheer & Venkatraman, 1995). Hennart
(1994) provides the comparative institutional approach to answer whether and how firms can
13
make a make-or-buy decision and earn supernormal profits. Nevertheless, market failure is
not equivalent to saying why firms succeed; this could mean that it is more efficient to use a
mix of both methods (hierarchy and prices) than to specialize in either (Demsetz, 1988;
Hennart, 1993). We ought to consider the intermediate governance modes, such as hybrids.
The emphasis of transaction cost economics that compares the alternatives of governance
structure has led to the neglect of other determinants of economic organizations. Thus, in
addition to economic factors, scholars suggest that social factors, such as the roles of
interdependence (Heide & John, 1988) or the degrees of power-dependence (Bovik & Reve,
2002), trust (Zaheer & Venkatraman, 1995; Joshi & Stump, 1999) have significant impacts on
IORs research. Viewed another way of patterns of relationship or embeddedness, the extent of
dependence or the relational characteristics such as trust and duration of relationship, because
of such relationship that existed prior to forming international subcontracting relationships, is
an ex ante condition or initial context where partners have cooperative motive and negotiate
(Heide & John, 1988; Yan & Gray, 1994; Inkpen & Beamish, 1997, p.195). Subsequently, we
discuss determinants of relational governance from the perspectives of patterns of relationship
in asymmetric IORs.
Unilateral and Symmetry Dependence
As long-term relationships require more time and resources, resource dependence theory
becomes a core feature of relational exchange (Rokkan & Haugland, 2002). Based on
resource dependence theory, few organizations are internally self-sufficient to critical
resources. To survive, firms will seek to reduce uncertainty and manage dependence by
establishing their exchange relationships with partners who control these resources. Therefore,
this theory views IORs governance as a proactive strategy to deal with environmental
conditions of uncertainty and dependence (Pfeffer & Salancik, 1978; Heide, 1994). The
14
establishment of an interfirm links, such as contracting, joint ventures, is viewed as dealing
with the problems of uncertainty and dependence (Heide, 1994). Stated differently, relational
governance in this paper can also be considered as an interfirm links as Heide (1994)
demonstrated.
We could examine the role of unilateral dependence in the asymmetric international
subcontracting relationships. In a condition of unilateral or asymmetric dependence, only one
partner makes a resource commitment, the other may have opportunism, take advantage of the
situation and extract a partner’s profits by influencing the behavior of more dependent partner.
This condition would be detrimental to exchange relationship and decrease bilateral
governance (Heide, 1994; Rokkan & Haugland, 2002). When the powerful firms perceive the
partners as being dependent on them, they will have little desire to develop a long-term
cooperative relationship (Ganesan, 1994). In addition, symmetric dependence is that the
partners have a joint motivation of forbearance and craft a self-enforcing agreement that
makes the expected benefits exceed the potential short-time gains (Heide, 1994). The effect of
symmetric dependence is to create a lock-in condition, which in turn promotes the continuity
of exchange relationship. The symmetry of relationship will determine the degree of common
interests that is important for relational exchange (Rokkan & Haugland, 2002). If Taiwanese
supplier can develop symmetric dependence with international firms, it will be useful for
long-term cooperative relationship. According to the above arguments, we can state these
propositions as follows:
P1a: In an asymmetric international subcontracting relationship, the degree of unilateral
dependence of the weak actor on the dominant partner is negatively associated to the
degree of relational governance adopted by the weak actor.
P1b: In an asymmetric international subcontracting relationship, the degree of symmetric
15
dependence of the weak actor on the dominant partner is positively associated to the
degree of relational governance adopted by the weak actor.
Trust
Trust is an expectation about an exchange partner that results from the partner’s expertise,
reliability and intentionality (Ganesan, 1994). Kern and Willcocks (2000) argue that trust is
related to one partner’s prior belief that the other will perform the required contractual
exchanges and will result in beneficial outcomes. Partners in interfirm relationships require
trust to achieve problem solving and lead to higher level of loyalty. Relationships
characterized by trust will foster commitment through reciprocal principle and emphasize a
spirit of ‘win-win’ (Morgan & Hunt, 1994). In addition, trust could reduce transaction costs
and reflect to the extent to which negotiations are fair. Thus, trust is a necessary condition for
relational governance (Zaheer & Venkatraman, 1995).
Morgan & Hunt (1994) propose that partners in exchange relationship could foster trust
and commitment through shared values, common beliefs, information sharing and
communication. Partners will cooperate effectively and achieve mutual goals, when
commitment and trust are present. Particularly, based on social exchange theory, retailer’s
satisfaction with equitable outcomes will increase its perception of supplier’s trust and
credibility (Ganesan, 1994). In such trusting relationship, retailer is likely to involve a
long-term orientation toward supplier. According to the above literature, we propose as
follows:
P2: In an asymmetric international subcontracting relationship, the degree of trust of the weak
actor on the dominant partner is positively associated to the degree of relational
governance adopted by the weak actor.
16
Moderating Effects of Intangible Asset Specificity
Safeguarding problems that are determined by the extent to which the assets of the
relationship parties are specialized to transaction are the most commonly examined
governance problems (Klein, Crawford & Alchian, 1978; Zaheer & Venkatraman, 1995;
Rindfleisch & Heide, 1997; Joshi & Stump, 1999). Especially, under the supposition that
firms involve in the trading of strategic resources which are imperfectly mobile, untradable
and causal ambiguity, firms will be in face of significant hold-up problems (Chi, 1994). Thus,
after classifying the antecedents of governance problems, several researchers highlight that
the choice of governance mechanisms such as and relational norms can be used in managing
IORs. Accordingly, (intangible) asset specificity is characterized by heterogeneity, imperfect
mobility and causal ambiguity. When firms invest in specific assets which represent a
substantial cost of doing business, they should curb opportunistic behaviors through such
governance mechanisms. In addition to efficiency perspective, based on value-creation
perspective (Dyer & Singh, 1998), firms should establish the appropriate governance
mechanisms for providing the solution of difference in bargaining power to obtain relational
rents and achieve competitive advantages in asymmetric IORs. We will specially investigate
the effects of intangible asset specificity on relational governance.
Investments in specific assets are “investments made by a firm that are of considerably
less value outside the focal relationship” (Heide & John, 1990). They view building close
buyer-supplier ties as responses to the need for safeguarding specific assets. In the
knowledge-driven economy, researchers indicate that intangible and human assets specificity
play a significant role in exchange relationships (Rindfleisch & Heide, 1997; Subramani &
Venkatraman 2003). For instance, Zaheer and Venkatraman (1995) develop the concept of
human asset specificity and procedural asset specificity rather than physical asset specificity
17
to interpret the context of service industry. Moreover, Subramani and Venkatraman (2003)
explore the impacts of leveraging intangible assets that are embedded in firms’ operating
processes and organizational routines on governance choices. There are business process
specificity, in terms of critical specific processes of firms, and domain knowledge specificity,
in terms of knowledge and expertise that is specific to requirements of other firms, in the
relationship-specific intangible investments. Ongoing interaction between partners is needed
for exchange of tacit, procedural knowledge, when such specific assets are relevant to mutual
development and learning (Nooteboom, 2004). Although supplier firms don’t extract
safeguards and exercise power with more powerful firms ex ante, they could change the
situation by investing in intangible asset specificity ex post (Subramani & Venkatraman 2003);
that is, a phenomenon of ‘fundamental transformation’ from large to small members of
options (Williamson, 1985).
Assets specificity leads to transaction cost and governance problem because it could
change power-dependence relationship (Ganesan, 1994). However, concurrent investment in
specific assets could set up a mutual reliance relation or a self-enforcing contract. It fosters
adaptation to uncertainty and conflict problem (Joshi & Stump, 1999). To begin with,
transaction costs increase with initial investment in specific assets. Nevertheless, partners
achieve a high level of trust and symmetry dependence or above some minimum threshold
level of trust; repeated investments serve as a credible signal of trust and commitment (Dyer,
1997). When transactions are supported by credible commitments, partners will reduce
transaction cost and maximize transaction value. Zaheer and Venkatraman (1995) also
examine that the interaction of trust and asset specificity could increase the extent of
structural dimension of relational governance. Thus, in asymmetric international
subcontracting relationships, if Taiwanese suppliers invest intangible asset specificity that
embedded in their own routines, knowledge processes and core competence, international
18
firms could increasingly be dependent on Taiwanese suppliers. The relative bargaining power
would change. According to the above literature, we propose as follows:
P3a: The negative relationship between unilateral dependence and relational governance in an
asymmetric international subcontracting relationship will be attenuated with increasing
degree of intangible asset specificity.
P3b: The positive relationship between symmetry dependence and relational governance in an
asymmetric international subcontracting relationship will be enhanced with increasing
degree of intangible asset specificity.
P4: The positive relationship between trust and relational governance in an asymmetric
international subcontracting relationship will be enhanced with increasing level of
intangible asset specificity.
-----------------------------------------------Insert Figure 1 here
------------------------------------------------
Conclusion
Research in the field of international business research has explained why MNEs engage
in foreign direct investment rather than licensing. However, the changing economic
geography of globalization has an important influence on world level as well as national and
subnational levels (Buckley & Ghauri, 2004). The advantages of subcontracting allow MNEs
to avoid the high cost of foreign direct investment and simultaneously govern their location
advantages while MNEs organize their cooperative relationship with indigenous firms (Chen,
19
2005). Thus, the impact of host country context on MNEs behavior is worthy to receive more
attention (Ramamurti, 2004), especially in Taiwanese high-tech industries.
Based on the asymmetric IORs perspective, the study offers distinctive explanation about
governance issue of the weaker actors, i.e. the disadvantageous subcontractors. We identify
the relative power-dependent relationship of dyadic firms by distinguishing between ex ante
and ex post considerations of asymmetric IORs. Patterns of relationship such as trust and
degree of dependence have been considered prior to the interorganizational cooperation.
When Taiwanese suppliers invest in specific assets, hold-up of governance problems stem
from asymmetry in information flow ex post. The condition would be more serious if
appropriate arrangements are not designed. Fortunately, intangible asset specificity plays
more important role in IORs governance mechanism than physical assets (Dyer, 1998;
Subramani & Venkatraman 2003). We suggest that Taiwanese suppliers could take advantage
of their human resource, knowledge and design capabilities to reduce their dependence on
international larger MNEs.
This study also stresses on the role of relational governance in asymmetric IORs on the
basis of intangible asset specificity. Taiwanese suppliers should build long-term relationship
and credible commitment with international firms by relational capabilities that
simultaneously manage embedded ties and organize their own knowledge utilization
(Lorenzoni & Lipparini, 1999). If well managed and organized, such relational governance
could eliminate the hazards of hold-up problems and compensate for disadvantages of
asymmetric dependence on international firms.
20
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Unilateral dependence
Symmetry dependence
P1
Relational
governance
P2
Trust
P3
P4
Intangible asset
specificity
Figure1. A conceptual framework of relational governance
25